Money Matters - Simplified

Oil Services Get Squeezed

In my last rig roundup, I suggested that oil and gas producers might be putting the screws to service companies. Oilfield supplies got tight during the boom, allowing contractors to ratchet up rates regardless of the service quality. Now that we've got a sharp slowdown in activity, the operators once more have the upper hand.

Back in February, XTO Energy (NYSE: XTO) predicted
25% across-the-board service cost declines by the end of the year.
That's now looking conservative, as the downturn has been fiercer than
practically anyone expected. We'll get a better sense of the
concessions being made once companies start holding first-quarter
conference calls, but in the meantime, we can look at drilling
contractors' monthly fleet status reports to get some sense of the
pressure being applied.

Taking a look at Pride International 's (NYSE: PDE)
April report, rates looked pretty steady, with one exception. Pemex
managed to extract some significant rate concessions in exchange for
longer-term contracts on a handful of jackup rigs working in Mexico.
The most dramatic example is the Pride Louisiana accepting a 146-day
extension, coupled with a roughly one-third decline in the dayrate.

Things are a bit bumpier over at Ensco (NYSE: ESV), which reported tons of tweaks in its fleet status report this week.

ConocoPhillips (NYSE: COP) looks to be playing a
bit of hardball, taking the ENSCO 102's dayrate down from the high
$280,000 range to the high $190,000s, with no change in term. At least
with the ENSCO 104, Conoco is taking a three-month extension as it
brings the rate down a peg.

In the U.S. Gulf of Mexico, several jackup rates moved lower. An ExxonMobil (NYSE: XOM) contract is on an indexed rate, so no surprises there. But somehow, Apache
(NYSE: APA) managed to haggle its way down from the mid-$80s to the
mid-$50s on a rig that's next slated to work for Pemex at double the
latter rate.

This is just one small slice of the oilfield service space, but I
think the 30%-plus declines seen in some of these rates is fairly
representative of what we can expect across the industry this year. Now
you see why I was so hesitant to recommend an oil services stock in our
Best Stock for 2009 series. (Core Laboratories
(NYSE: CLB) is up about 28% year-to-date, by the way.) It's possible
that investor expectations are fully in step with the depressed
realities of today's oil and gas market, but I would still remain
cautious about committing too much capital to this space.

© 2009 UCLICK, L.L.C.